EMCORE Corporation
Q3 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

Welcome, ladies and gentlemen, to the EMCORE Corporation Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Victor Allgeier. Please go ahead.

[Victor Allgeier:]

Thank you, and good afternoon, everyone. Before we begin, we would like to remind you that the information provided herein may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Such forward-looking statements include, in particular, projections about future results, statements about our plans, strategies, business prospects, changes in trends in our business and the markets in which we operate. Management cautions that these forward-looking statements relate to future events or future financial performance and are subject to business, economic and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements. Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in our filings with the U.S. Securities and Exchange Commission that are available on the SEC's website located at www.sec.gov, including the sections entitled Risk Factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q. We assume no obligation to update any forward-looking statements to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation. With us today from EMCORE are Dr. Hong Hou, President and Chief Executive Officer; and Mark Weinswig, Chief Financial Officer. Mark will review the financial results and Hong will discuss business highlights before we open the call up to questions. I'll now turn the call over to Mark.

[Mark B. Weinswig:]

Thank you, Vic, and good afternoon, everyone. Today, I'm going to focus my discussion on our third fiscal quarter operating results and our balance sheet. Please note that we have included a supplemental presentation on our website to assist in better understanding the company's results. Consolidated revenue for our third fiscal quarter totaled $33.5 million, which is a decrease of $8.8 million or 21% over the previous quarter. The decrease was primarily due to lower Photovoltaic revenue and we had a large international order that was delayed. Our Q3 revenue guidance was $35 million to $39 million. On a segment basis, our Photovoltaics business accounted for $11.9 million or 36% of the company's total revenue. This represents a $7.2 million or 38% decrease from the prior quarter. As we have said previously, while we remain confident in the long-term prospects of the Photovoltaics business, our revenues in any given quarter may be a bit lumpy. In Q3, we experienced this lumpiness when the delivery of an international shipment of a few million dollars was delayed until Q4. Since June 30, we have shipped the product to the customer and we expect to recognize this revenue in Q4. The Fiber Optics segment accounted for $21.6 million or 64% of the company's total revenue. This represents a decrease of roughly $1.6 million or 7% from the prior quarter. Hong will discuss the outlook for the Fiber Optics business later in the call. On a segment basis, Photovoltaics gross margin decreased 4 percentage points to 28.6%. We continue to believe that this business' target gross margin is at 30%. Fiber Optics gross margin was 3%, 4 percentage points lower than the prior quarter. We recorded an excess and obsolete inventory charge of almost $1 million in the quarter; otherwise, the gross margin for the Fiber Optics business would've been closer to 7%. Our gross margins have been impacted primarily due to lower revenue levels and negative impact from our Tunable XFP product line through the ramp-up stage. We expect our gross margins in the Fiber Optics segment to improve in future quarters as we complete the ramp-up of our new product line at our contract manufacturer and our Fiber Optics revenues increase. Consolidated gross margin was 12.1%, a 6.4 percentage point decrease from the prior quarter, primarily attributable to lower Fiber Optics and Photovoltaics segment margins. Total operating expenses for R&D and SG&A were $11.7 million, excluding any flood-related charges and recoveries, gain on sale of assets, legal settlements and impairment charges. The increase in our operating expenses from the prior quarter was primarily due to increases in certain R&D areas. We believe that our operating expenses should be around $11.5 million per quarter going forward. On a GAAP basis, the consolidated net loss for the third quarter was $7.3 million. Our GAAP net loss per basic and diluted share was $0.27. Our non-GAAP net loss after excluding certain adjustments, all of which are set forth in the non-GAAP tables included in today's release, was a loss of $5.9 million versus $33,000 of income in the prior quarter. Please note that we have included additional information regarding amortization, stock comp and other items in today's release and in our supplemental presentation to provide further clarity on our results. Now on to order backlog, which we define as purchase orders or supply agreements accepted by the company with expected product delivery and/or services to be performed within the next 12 months. At June 30, the company had a space Solar order backlog for approximately $58 million versus $36.5 million at the end of the prior quarter. The significant increase was primarily from large international orders. Moving on to the balance sheet. At the end of June, the company's cash and cash equivalents and restricted cash balance was $6.6 million. This did not include any proceeds from the $4.8 million sale of our interest in the Solar joint venture, which we announced in June. We expect to recognize the gain from the JV sale transaction in the fourth quarter. Over the past year, we've made significant strides in improving the business structure. We look forward to showing further progress as we continue to drive execution and increase our revenue levels. In July, in order to continue to drive our break-even revenue level down further, we implemented a headcount reduction and cost reduction effort. With that, I will turn the call over to Hong who will discuss the company's strategic and operating initiatives and provide revenue guidance for the fourth quarter.

[Hong Q. Hou:]

Thanks, Mark. Good afternoon, everyone. As Mark discussed, we achieved the consolidated revenues of $33.5 million in the June quarter, which was below our guidance. This was mainly due to a delay in the delivery of large solar cell shipment to an international customer. The required approval for shipment was delayed beyond the June 30 cutoff date. This shipment, however, has since been made successfully. And its revenue is recognized in the current quarter. Several other unexpected events also contributed to the low revenue level in the June quarter and the resulting operation loss. We experienced lower-than-expected orders in our broadband business due to an unusual reduction in MSO CapEx and delayed revenue contribution from new product, Tunable XFP, due to production ramp-up challenges. Our management team had already responded to these challenges with the implementation of several cost reduction initiatives, as Mark mentioned, that include headcount reduction and discretionary spending reduction in our broadband business in addition to other concerted efforts to focus on revenue growth and process improvements on new product introductions in our telecom component business. We now believe that we have a sustainable cost structure in place that will successfully return us to profitability in the near future. Our goal is to reduce our break-even quarterly revenue rate to between $46 million and $48 million. Today, we have seen significant improvement in the market situation and product demand in the business areas we serve. We expect a strong September quarter in both Photovoltaics and Fiber Optics segments and hold an even more optimistic outlook for the December quarter. Now let me give you an update on our businesses and how we're responding to the current market conditions. First, I will start with the Space Photovoltaics business segment. As we indicated in the last quarter's conference call, we saw a gap in aerospace programs in the June quarter, which led to a lower-than-typical revenue run rate. In addition, we experienced a delay in approval of a large shipment to the international customer. The gross margin for the Space Photovoltaics business was 28.6%, a sequential decline compared to the last quarter due to the lower revenue. Despite this decline in revenue, the Space Photovoltaics division still generated more than $1.3 million net profit in the June quarter, which indicates that this business has an effective cost structure and continues to be a positive cash-generating entity. In the past quarter, the Space Photovoltaics division was awarded more than 10 separate contracts from customers, both in the U.S. and around the globe. Total value of those contract awards was in excess of $35 million. As a result, the order backlog for this division as of June 30 for delivery over the next 12 months showed a sequential increase of $21.5 million to a total of $58 million, which is at the record levels. We're also seeing several recent orders to one of our major commercial telecommunications satellite manufacturer customers, which represent a strong rebound from an otherwise sluggish trend seen in the early part of 2013. With the recent bookings in Q3 and expected bookings in our Q4, our outlook for the next 4 quarters for this division looks very solid. We expect a robust business for EMCORE from this business segment in the near future. We also continue to make progress on developing new products with higher performance and lighter weight solar cells for spacecraft applications with the introduction of our IMM solar cell technology into roller [ph] manufacturing over the next couple of years. We believe this enabling technology will set us apart from our competition and creates a competitive edge for our customers. Now let me discuss the sale of EMCORE's equity stake in the CPV joint venture, Suncore. EMCORE had a 40% equity interest in the joint venture with San'an Optoelectronics in China to design and manufacture CPV solar modules and systems. Due to the dramatic change in the market dynamics and the competitive landscape of solar power industry, the joint venture needed to expand its business scope into project development and in some cases, even as a project owner-operator. This business direction is beyond the current and planned scope of EMCORE's business. With the approval of EMCORE's Board of Directors, we negotiated and entered into an equity transfer agreement in June, pursuant to which the company agreed to sell its 40% equity interest in Suncore to San'an Optoelectronics for $4.8 million. Closing is expected to occur in the current quarter. The net book value of the joint venture was 0 on the EMCORE's balance sheet as of June 30, 2013. Again, related to this transaction, it's expected to be booked in the September quarter upon the closing of the transaction. Going forward, EMCORE will continue to be the primary supplier to Suncore for concentrated solar cells. However, EMCORE now have minimal exposure to the risks of the solar power market going forward. Now let me discuss our market position and business outlook in our Fiber Optics business segment. In the broadband cable TV business, as we indicated in our conference call for the March quarter, the demand from MSOs for use of structure upgrade was slow in the first quarter of the year. Beginning in June, our cable TV broadband customers stated that their inventory has been reduced to a reasonable level due to a demand uptick from their customers. As a result, the booking activity from our customers in the broadband business started to show a significant improvement. This is consistent with the capital spending plans that were announced over the last couple of days by the MSOs. Over the past week, 2 major cable service operators reported their CapEx in the June quarter and their budget for the rest of 2013. Compared to the March quarter, their June quarter CapEx spending increased over 20% in the infrastructure upgrade category, which is most related to our business. We started seeing the momentum towards the latter part of the June quarter as our customers are depleting their inventories. It is positive to note that both MSOs are projecting higher total CapEx spending in 2013 than in 2012 and the largest MSO in the U.S. reported a plan of about 10% more CapEx spending for the second half of the year than the first half. Therefore, we are optimistic about the rebound of the cable TV demand for the September quarter and this December quarter. Our strategy in expanding our business to return path and node is bearing fruit. We were awarded with a first node receiver design win in one of the major equipment manufacturers. This is expected to add a new line of business to our broadband division. The good news is that the spender committees in the cable TV broadband industry have never been so dynamic and excited in formulating drastic system upgrade strategies. The industry has been projecting that downstream bandwidth will experience a cumulative annual growth rate greater than 50% per year and upstream of 30% per year. This demand trajectory is consistent with their experience over the past 30 years. DOCSIS 3.1 is to modernize the MAC and the physical layers and spectrum plan to increase the transmission bandwidth with existing cable plan infrastructure. Facility constraints in power, air-conditioning, floor space, et cetera, will require improved power efficiency and channel density in this decade. That is a major driver for the CCAP rollout. The transport equipment is required to be able to transmit signal up to 1.2, even in the future, 1.8 gigahertz over the legacy HFC infrastructures, some of which were deployed decades ago and designed to transmit signals up to 1 gigahertz only. This retrofit strategy is most effective in expanding the bandwidth capacity of the HFC infrastructure and to compete with fiber-to-the-home service provided by telcos. Many cable TV industry experts claim that the bandwidth provided by CCAP and DOCSIS 3.1 can compete with any fiber-to-the-home technology. We are engaging with all the equipment manufacturers very closely in designing and qualifying transmitter receiver products would comply with the new standards. 2 out of the 3 leading cable TV equipment manufacturers have completed the validation of a new transmitter product to the DOCSIS 3.1 standard and then they have began the shipment of these new products. The revenue for CATV broadband business is expected to show a marked improvement in the September quarter. We are optimistic about the future of this business based on the engagement level and the qualification activities on our new products, as well as the CapEx outlook given by the MSOs. After the new cost structure we have put in place, we believe the business can return to profitability in the near future. Moving on, our business in telecom segment, during the June quarter, the revenue from telecom product lines was flat compared to the March quarter. We lost some ITLA market share due to -- during the annual pricing negotiations, primarily for 40-gigabit lasers, and some demand decrease from a leading equipment manufacturer for coherent products. This was primarily related to the change from 2 lasers to 1 laser in the coherent LAN card design enabled by their new DSP chip. However, the demand for our coherent products remained strong throughout the quarter despite these issues. During the June quarter, we saw certain customers pulling in their orders for ITLAs to support their demand for 100-gigabit LAN cards. We hope this momentum will continue throughout the current quarter. As indicated by the latest informatics presentation, the 100-gigabit LAN cards and transponders are the most economical way to expand bandwidth. The 100-gig coherent optics is expected to grow from 5% of the total ports today to 37% by 2015. EMCORE's ITLA and micro-ITLA will continue to be the leading solution for the transmitter components and should benefit from this trend in the market. EMCORE's ITLA design continues to demonstrate advantages over our competition especially when it comes to longer distance and higher data rates such as 100 and 400 gig. While this is early, we are starting to see demand for new coherent modulation applications such as 16 QAM targeted at 40 -- 400-gigabit applications. EMCORE's ITLAs are confirmed as the lead supplier for every 16 QAM 400-gig coherent OEM program. On the micro-ITLA front, we have experienced a great market response and strong design-in activity since we have commenced our volume production in March. Currently, we have engaged in more than 10 design-in programs for 100-gigabit coherent applications. We continue to enjoy the lead in the industry as EMCORE's micro-ITLAs enable the first transponder coherent 100-gig LAN cards. The qualification and validation process of our customers' next-generation 100-gigabit platforms are expected to be completed in the September quarter. We expect a significant increase in demand for micro-ITLAs once the customers commence volume production for their new LAN cards in the later part of this year. Micro-ITLA not only enables the new applications due to its superior performance with low power consumption and small form factor but also serves as our key strategy to drive positive market share shift as micro-ITLAs will eventually cannibalize the regular ITLA market. On the Tunable XFP product line, we secured more design wins from a major customer on several platforms due to low power consumption and superior OSNR performance in our Tunable -- of our Tunable XFP product. We're able to start meeting customers' volume demand despite lower yield than in our targets. We conducted a thorough review on the Tunable XFP assembly and testing processes during the quarter. The engineering team was able to fully understand the root causes for the low yield and implemented corrective actions. Although this is a product line which is losing money due to the yield you see currently -- just for your information, this is about a $2 million loss in the gross margin in Q3, in the June quarter. But we expect yield and throughput for the September quarter will demonstrate a market improvement and a bridge to a desirable yield and throughput level by the December quarter. At that level, we expect positive contribution margins from this product line. We're confident about the competitive advantage of EMCORE's Tunable XFP in both negative and 0 chirp with a full band tunability, better OSNR and higher output power. These are the key attribute requirements for replacing 300-pin transponders we have started on this year. Our engineering team is developing a compact integrated tunable transmitter for 100-gig coherent market. This is the evolution in our advancements in Indium Phosphides for our lasers and modulator technology. This new development provide improvements in size, power consumption, output power, LAN width [ph] and cost, which enable new market segments for profit-driven coherent market. We plan to demonstrate our prototype unit in an upcoming trade show. Our goal is to stay ahead of the competition with advanced technology developed and to commercialize a full line of products for 100-gig and 400-gig coherent applications. Turning to guidance for the fourth quarter of the fiscal year 2013 ending September. Our revenue expectation is in the range of $42 million to $45 million with improvement from both in Fiber Optics and Space Photovoltaics segments. We expect to see a significant positive impact to our bottom line due to the -- that increase to revenue, cost reduction and the yield improvement effort. In summary, we feel that we are coming out of a trough with significantly improved revenue outlook, improved engineering yield and reduced cost base. Our focus this quarter is on completing multi new product line -- new product introduction for our cable TV business and ramping up the revenue contribution from the Tunable XFP product line. We are back on track and we look forward to discussing our progress in future quarters. With that, I will turn the call over to Q&A.

[Operator:]

[Operator Instructions] And our first question in queue is from Krishna Shankar of Roth Capital.

[Krishna Shankar:]

For the September quarter, do you expect growth in each of the 3 segments within the Fiber Optics area, the ITLA, Tunable XFP and the cable broadband, will all those 3 areas grow significantly in the September quarter?

[Hong Q. Hou:]

Yes, Krishna. So that's our expectation and for these 3 product lines, in the Fiber Optics segment, we expect a pretty significant growth in all of them. The ITLA will be -- continue to be very strong and micro-ITLA will be contributing to revenue but not in a significant way in the September quarter but it's going to be significant in the December quarter. The Tunable XFP, this third time around, we are very confident revenue is going to be growing finally with a respectable yield but in the December quarter, as I talked about, our yield levels is going to be meeting our expectations so that Tunable XFP will start contributing a positive margin in the December quarter. But the cable TV side, you were asking, we're expecting the September quarter is going to be a pretty significant growth over the June quarter and the December quarter. It's already looking stronger from the dynamics on the comments and demand from our customers. So yes, we do expect across our product lines, in our Fiber Optics segment, September is going to be a much better quarter.

[Krishna Shankar:]

And in Photovoltaics, you had kind of a lumpy June quarter but given the backlog and the visibility you now have, do you see relatively smooth growth going forward over the next few quarters in the Photovoltaic part of the business?

[Hong Q. Hou:]

Yes. So unfortunately, that business was a little bit lumpy. In the June quarter, we experienced a gap but our revenue -- our backlog has been, as I said, historically, at a record level, at the $58 million, that was not even counting on the new Satellite awards. One of our major customers in the last 4 weeks, they won 3 Satellite awards and just for your information, in the last entire year of 2012, they won 3 Satellite awards. So it was really -- the Photovoltaics division looks very, very solid and we expect the next 3, 4 quarters, are going to be very robust in terms of the -- our outlook in operating profit.

[Operator:]

Our next question in queue is from Dave Kang of B. Riley.

[Dave Kang:]

First of all, Mark, can I get some numbers from you? Can I get CapEx and depreciation and amortization, those 2 numbers?

[Mark B. Weinswig:]

Yes, of course. Thanks, Dave. So on the depreciation side, depreciation for the quarter was $1.7 million and our CapEx was also right around $1.6 million.

[Dave Kang:]

Okay. And then going forward, CapEx will be around that level?

[Mark B. Weinswig:]

No, CapEx is actually going to be down quite significantly so we did see this year, this year-to-date, we've had CapEx that's a little bit higher than normal because of ramping up of the Tunable XFP, but we believe that our 9/30 numbers will be closer to our kind of normal $1 million to $1.25 million per quarter of CapEx. But depreciation will be relatively constant.

[Dave Kang:]

Okay. And then just wanted to clarify, you said OpEx of $11.5 million for out quarters, is that GAAP, non-GAAP?

[Mark B. Weinswig:]

That's GAAP.

[Dave Kang:]

GAAP, okay. And then the biggest component there is stock compensation and it's going to be, what, about -- a little over $1 million?

[Mark B. Weinswig:]

Yes. Stock compensation we did disclose in the press release, but for SG&A and R&D total for the June 30 quarter, it was about $800,000 that we had for those 2 functions, for FAS 123R expense.

[Dave Kang:]

Okay. And then did you talk about the new break-even point with all the cost reductions and all that?

[Mark B. Weinswig:]

We did. A couple of quarters ago, we mentioned that when we had met the non-GAAP profitable level, we were able to do it at around $46 million, $48 million. Right now, our break-even revenue rate for non-GAAP breakeven is about $48 million to $50 million. But some of the reductions that we've done and some of the movements that we've been doing over the last couple of quarters, we've been trying to reduce that number down to $46 million to $48 million and that's our goal for right now. So with our guidance of $42 million to $45 million, we're getting pretty close to reaching that -- kind of that revenue break-even level that we need.

[Dave Kang:]

And then to break even at that level, $46 million to $48 million, your gross margin assumption is what?

[Mark B. Weinswig:]

Right now, it's kind of -- for our Solar business, it's close to our target gross margins, which we announced is about 30%. And on the Fiber Optics side, we have obviously a much lower point that we need to make that we need for that level to be at a break-even point. So something closer to the -- right around 20% or so.

[Dave Kang:]

20% blended or Fiber Optics?

[Mark B. Weinswig:]

Just for Fiber Optics.

[Dave Kang:]

Fiber Optics, got it, got it. And then can I get -- so what was the mix between Fiber Optics? What was the mix between ITLA and cable TV?

[Mark B. Weinswig:]

Yes, the -- sorry, one second. On the -- on what we call the digital products, which includes the ITLA product line, that business...

[Hong Q. Hou:]

Around $10 million.

[Mark B. Weinswig:]

Yes, that business was about $10 million in the quarter.

[Dave Kang:]

It was flat.

[Mark B. Weinswig:]

Yes. And then our broadband business was about $11.8 million.

[Dave Kang:]

And then -- I hate to keep asking all these numbers, but what was the mix between 40G and 100G in ITLA, is it still about 50-50?

[Hong Q. Hou:]

Dave, that's -- we have a hard time to really tell. Our customers are using, honestly, the same parts for 40 and 100, but I believe most of our parts are used for 100 gig. If I have to speculate, I would say probably over 80% of our ITLAs are used for 100-gig applications.

[Dave Kang:]

Okay. And then on the Tunable XFP, I mean -- so it sounds like more revenues in December, but what about September? I mean, are we recognizing any revenues in the September quarter, is it going to be another like $500,000 or so?

[Hong Q. Hou:]

For September, I think we should be right around $2 million, if not more.

[Dave Kang:]

$2 million, TXFP?

[Hong Q. Hou:]

Yes.

[Dave Kang:]

But then -- so you had $2 million loss in the June quarter. What's that loss going to be in the September quarter with $2 million revenues?

[Hong Q. Hou:]

So the June quarter loss has a lot to do with -- so we've reviewed, as I said, thoroughly on the process, assembly process and testing process. There's some parts we put aside. It was a deviate from our standard parts so we had a reserve about what -- $0.8 million or so. So half of that loss was really to clean the line so that we have a focus on a converged process and moving forward, that should be -- that loss should be reduced pretty significantly.

[Dave Kang:]

But still, you won't be 0, though, right?

[Mark B. Weinswig:]

It's not nearly...

[Dave Kang:]

Will it be close?

[Mark B. Weinswig:]

It'll be close, yes.

[Dave Kang:]

Close to 0, okay. And then, obviously, you said, contribution margins in the December quarter, so I'm assuming maybe over $3 million in December quarter. I hate to ask for guidance but just for directional.

[Hong Q. Hou:]

Yes, the directional. Yes, certainly, we'll more than $2 million, I think. As I said, we are focusing on fewer customers, focusing on fewer, bigger customers and to serve multiple platforms. We got a pretty healthy share allocation. So we'll start doing the BMI [ph] programs with those customers and I do think the trend will be very positive.

[Operator:]

Our next question in queue is from Alex Henderson of Needham and Company.

[Alexander B. Henderson:]

A couple of questions. First off, on the micro-ITLA side, just so that I understand with good clarity, the qualification process relative to you testing and relative to your customer's testing any blades that might incorporate that micro-ITLA has already been fully completed so that we are not at risk of any delays in the timing of ramp-up based on OEM qualification processes.

[Hong Q. Hou:]

Our component level qualification has completed and we are, at this point, just supporting our customers' LAN card or transponder qualification. For 10, 12 programs, they are at a different pace. And some of them are close to completion already for their product qualification. And at this point, we're more supporting in the firmware level. Some customers wanted to put the firmware feature mostly at a transponder level but there are some other customers like to put the features in the micro-ITLA level. So we just support at that level to different customer programs. I think it's going to be over half of the 10, 12 programs they will complete their product line level qualification in the June quarter. So that's why -- in the September quarter. That's why we are expecting pretty significant ramp for micro-ITLA demand in the December quarter as we expected before.

[Alexander B. Henderson:]

Okay. And so, as we are looking at the December quarter, what should we think about the mix between conventional ITLA and the micro-ITLA as a percent of the ITLA revenues? How should we be thinking about that for the December period?

[Hong Q. Hou:]

Right. So I would say, probably will be 80%-20%, 80% in the regular, 20% in the micro or even if it's ready to ramp up faster in the micro-ITLA for the transponder demand, it could drive to 70%-30%.

[Alexander B. Henderson:]

Okay. And I assume you've got pretty good handle on the margins on that product at this point. And you're feeling comfortable that those margins, as they ramp, will be comparable to your conventional ITLA business?

[Hong Q. Hou:]

Yes.

[Alexander B. Henderson:]

Okay. Let me shift gears to the Tunable XFP side. I'm a little puzzled by the commentary because I'm not sure I understood it. So the first one is you made the comment that you're fixing the issues and that you expect to ramp this to a point where it can be positive contribution to 4Q calendar, the December quarter. So I think in past, you've talked about $4 million to $5 million in revenue run rate for that to be breakeven. Is that what you mean by contribution or are you meaning that it will have a gross margin contribution to covering your overhead?

[Hong Q. Hou:]

Yes, so the way -- right now, as I said, let me just clarify the June quarter, we lost about $2 million with very minimal revenue, we cleared -- cleaned the line in the September quarter. I think we're going to be exceeding $2 million in revenue from the Tunable XFP, we'll be losing less than $1 million in projection but in the December quarter, I think our revenue is going to continue to trend up, to $2 million, $3 million, $4 million, we'll have the positive gross income because the R&D, SG&A level is still the same. So that positive growth income is going to be contributing to the bottom line as well.

[Alexander B. Henderson:]

All right. So when you're talking about breakeven, that's a fully allocated version than what you're talking about here is a gross margin contribution to covering your overhead costs, your OpEx costs?

[Hong Q. Hou:]

Right.

[Alexander B. Henderson:]

Right. So it's not a break-even product. Do you expect that to be able to reach breakeven quickly thereafter?

[Hong Q. Hou:]

Yes. And I think the -- as we said before, at the $5 million level, we're still holding, even though with some price erosion but we have been making a lot of progress in cost reducing this product as well. At the $5 million quarterly revenue level, we should be reaching breakeven for that product line standalone.

[Alexander B. Henderson:]

Great. Second question, I understood that a big portion of the problem had to do with the testing system giving you false negatives on some of the inventory that you've written off. First of all, is that accurate; and second, if that's accurate, do we -- should we anticipate at some point, some of that inventory will find its way back through the income statement and if that's the case, how do you plan to account for that?

[Hong Q. Hou:]

Yes, so it's a good question, Alex, but we were focusing on implementing the new test software, firmware. So we still have a long pile in there. We haven't go back and sourced through that yet. So we have increased the demand from customers and we believe we have a very robust process to continue to improve and we do have a superior product performance. So our focus, with limited resources at this point, is producing new products to meet the customer requirement, then we'll go back and comb through those parts we set aside.

[Alexander B. Henderson:]

Have you fully resolved the software issue and the test interface issue so that it no longer is a problem and then you've got that resolved or is there more work to be done? How should we be thinking about where you are on the visibility of finishing that fix?

[Hong Q. Hou:]

We got that resolved and we got that validated, we got that implemented. So right now, it's in the production line, not in the engineering lab anymore.

[Alexander B. Henderson:]

Okay. And then, so as you're ramping that up, what risks do we have left on it?

[Hong Q. Hou:]

I think this area, we don't have a whole lot of good credibility. We tried, so I don't want to promise anything, but we are absolutely making solid progress towards the volume production. I feel good about it.

[Alexander B. Henderson:]

Okay. Let me turn over to the cable side. A lot of the discussion you've given here is around improved conditions on capital spending from the key customers, pretty generic stuff, talking about CapEx on earnings release report and the like. Where are you in actually seeing the pickup in orders that -- POs in hand speak a lot louder than what us analysts can do out on the Street trying to figure out what cable spending's going to look like, which is what you're seeming to point to.

[Hong Q. Hou:]

Yes. So the POs in hands started from the June -- the month of June. We have been pushing very hard, pushing our customers in -- but their supply chain basically was telling us early in the June quarter that they were sitting on a pile of inventory. So they had to deplete that. And -- but we have been continuing to communicate with our customers and in the month of June, we started seeing the purchase orders flowing in and that momentum is continuing and then we are reaching out to our customers asking them to give a more outlook down the road so they are -- start projecting 2 months, 3 months, 4 months down the road, what the demand is going to be. So that's what we're gauging from the market dynamics. But in the past, as I said in April, if you ask customers, they said, "We don't even know what the demand is going to be because we're sitting on a pile of inventory as well." So they have since depleted that pile of inventory, and then the orders start flowing to us.

[Alexander B. Henderson:]

Just to be clear, as you've looked out at the share issues, there's no share erosion issues or competitive dynamic changes or product obsolescence issues. This is strictly an inventory correction and seasonal swing in demand associated with the timing of rolling out the DOCSIS 3.1 plus the normal seasonality of ordering of CapEx. Is that correct?

[Hong Q. Hou:]

Yes. So this is really -- this is seasonality and the inventory correction, primarily. We did lose a little bit of share in the European market for laser components and receiver components but that only accounts for about 5% of our total broadband business revenue. So for example, the $20 million we used to do, $19 million, $20 million, out of which about $1 million is for the components from the European market. But during the flood, we were not able to serve multiple customers fronts and we lost some market share with those customers and -- but the majority of the business decline was just the inventory correction and the microeconomics for the cable TV, not market share loss.

[Operator:]

[Operator Instructions] And with that, I'm showing no further questions in queue. I'd like to turn it back to management for closing remarks.

[Hong Q. Hou:]

Thank you very much for dialing in today. We plan to present at Citi's 2013 Global Technology Conference on September 3, 2013, in New York City and ROTH Capital Partners' Semiconductor Corporate Access Day in San Francisco on September 9, 2013. We look forward to talking to you during those events. Thank you very much. Bye.

[Operator:]

Again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.